Why trade restriction lowers everybody's living standards

Paul Krugman writes that
trade does not equal jobs and concludes that trade restrictions
cannot even in principle trigger a depression. After
all, restricting trade means restricting exports (less jobs!) but
it also means restricting imports (more jobs!) so everything washes
out.

Well, let's try an extreme example. Suppose I
prevent everyone in America from trading with anyone outside their
own households. We'd eat only what we could raise in our own
gardens, burn only the fuel we could gather from our own backyards,
and wear only the clothes we could make for ourselves. In other
words, we'd all be living pretty much at the subsistence level.
Would you be willing to call that a Depression? I would. Krugman,
apparently, would not.

Lansburg is dead right. In my book I argue that prosperity is
directly proportional to the degree of specialisation and exchange,
or to put it in Adam Smith's words, the `division of labour is
limited by the extent of the market'. That is to say, throughout
human history, people have moved away from self-sufficiency towards
working for each other and grown more prosperous as a result. When
you work for each other, you can be more productive because you
specialise in tasks at which you are skilled or for which you have
labour-saving devices.

Working for yourself means consuming only what you can produce.
It makes you a more diversified producer but a more limited
consumer. If you had to make your own food, fuel, clothing and
shelter, you would have a lot less time to make things like light
or entertainment. The key metric is time taken to fulfil a need or
a desire.

Here's an example from the blog whence the picture above
came, Eden's Path, written by a couple who are
trying to be as self-sufficient as possible in Virginia:

We got tired of spending over $1-a-bar for
soap several weeks ago, so we started looking around for ways to
make soap at home. Most soapmaking was either dangerous - "lye can
cause an explosion" - or too time-consuming - "let the soap cure
for 30-days." So, we kept looking until we found the perfect
solution. Our 3.5-ounce bars of soap now cost us only $0.65/each,
take about 30-minutes to make, and do not put us in danger of being
blown off the face of the earth. All good reasons to make your own
soap.

Hang on. They are taking 30 minutes to save themselves 35 cents
per bar. Even if you assume it takes two of them only 30 minutes
each to make 24 bars, and that they use as many as two bars a
month, they are spending 60 minutes to make a saving of just under
eight dollars. That's almost exactly the minimum wage.

Here's a paragraph from my book, The Rational Optimist, on the
subject of self-sufficiency:

In 2009, an artist named Thomas Thwaites set
out to make his own toaster, of the sort that he could buy from a
shop for about £4. He needed only a few raw materials: iron,
copper, nickel, plastic and mica (an insulating mineral around
which the heating elements are wrapped). But even to get these he
found almost impossible. Iron is made from iron ore, which he could
probably mine, but how was he to build a sufficiently hot furnace
without electric bellows? (He cheated and used a microwave oven.)
Plastic is made from oil, which he could not easily drill for
himself, let alone refine. And so on. More to the point, the
project took months, cost a lot of money and resulted in an
inferior product. Yet to buy a £4 toaster would cost him less than
an hour's work at the minimum wage. To Thwaites this illustrated
his helplessness as a consumer so divorced from self-sufficiency.
It also illustrates the magic of specialisation and exchange:
thousands of people, none of them motivated by the desire to do
Thwaites a favour, have come together to make it possible for him
to acquire a toaster for a trivial sum of money. In the same vein,
Kelly Cobb of Drexel University set out to make a man's suit
entirely from materials produced within 100 miles of her home. It
took 20 artisans a total of 500 man-hours to achieve it and even
then they had to get 8% of the materials from outside the 100-mile
radius. If they worked for another year, they could get it all from
within the limit, argued Cobb. To put it plainly, local sourcing
multiplied the cost of a cheap suit roughly 100-fold.

However, the evolution of society towards increased
specialisation and exchange is not unidirectional. History is
littered with examples of people who moved back towards
self-sufficiency as they grew less prosperous. Unable to find
trading partners to do mutual service with, they had to serve
themselves and that made them poorer.

Two examples, both from The Rational Optimist:

The economist Vernon Smith, in his memoirs, recalls how in the Depression his
family moved in the 1930s from Wichita, Kansas, to a farm when his
father was laid off as a machinist, because 'we could at least grow
most of our own food and participate in a subsistence economy.'

And the end of the Roman empire.

As Roman rule disintegrated, at least
in the west, money lending at interest stopped and coins ceased to
circulate so freely. In the Dark Ages that followed, because free
trade became impossible, cities shrank, markets atrophied,
merchants disappeared, literacy declined and - crudely speaking -
once Goth, Hun and Vandal plundering had run its course, everybody
had to go back to being self-sufficient again. Europe de-urbanised.
Even Rome and Constantinople fell to a fraction of their former
populations. Trade with Egypt and India largely dried up,
especially once the Arabs took control of Alexandria, so that not
only did oriental imports such as papyrus, spices and silk cease to
appear, but those export-oriented plantations in Campania became
the plots of subsistence farmers instead. In that sense, the
decline of the Roman empire turned consumer traders back into
subsistence peasants. The Dark Ages were a massive experiment in
the back-to-the-land hippy lifestyle (without the trust fund): you
ground your own corn, sheared your own sheep, cured your own
leather and cut your own wood. Any pathetic surplus you generated
was confiscated to support a monk, or maybe you could occasionally
sell something to buy a metal tool off a part-time blacksmith.
Otherwise, subsistence replaced specialisation.